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Pension benefits to be cut


The government has proposed plans to reduce the benefit a person receives for delaying their state pension payments.

Under current rules, people nearing the state pension age are encouraged to keep on working and delay taking their state pension. As a reward for deferring pension payments, a person can receive an extra 10.4% state pension for each year that payments are deferred.

However, this could drop to 5.8% as early as 2016 to coincide with the new flat rate pension.

This reduced incentive to continue working means that in order to make a deferred pension financially worthwhile, a person would have to live for 19 years into retirement, as opposed to 10 years under the current rules.

However, whilst the new rules are unlikely to generate support from those nearing the retirement age, Tom McPhail, head of pensions at Hargreaves Lansdown was not surprised by the decision.

McPhail said: "With the population living longer and more people staying in the workforce later, it is hardly surprising that the government has chosen to cut back on this generous rate of return".

He continued to say that the new rate is still an “attractive proposition” to people who are generally healthy and have “substantial private savings”.

Neutral view to retirees

Whilst the current rules were originally brought in during the 1990s as an incentive for people to delay taking their state pension, the Department for Work and Pensions (DWP) have now stated that they have taken a “neutral view” as to when they would prefer people to start taking their state pension.

As a result, the government felt necessary to adopt a more cost-neutral view when deciding how much a person should be incentivised to delay retirement.

Pensions minister, Steve Webb said that the decision to reduce pension benefits was a fair one which was based on advice from the Government Actuary.
The government have taken action in recent years to reduce pension payments to an aging population as businesses can no longer force a person to retire at state pension age. Additionally, MPs have also suggested that the state pension age could be increased faster than previously expected.

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